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Why Did the Fed Upgrade Its GDP Forecast for 2018?

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GDP forecast from the SEP

In its March FOMC (Federal Open Market Committee) meeting, the Fed increased the Federal funds rate by 25 basis points and released the upgraded economic projections through the Summary of Economic Projections (or SEP) report. The report is released by the FOMC and contains the members’ projections for GDP growth, inflation (TIP), unemployment, and the policy interest rate. The SEP is released four times per year. The first release is in March, and the rest are in June, September, and December. In the latest SEP release, the Fed upgraded its GDP growth outlook for 2018 by 0.2% to 2.7%, compared to the 2.5% growth outlook in December 2017 and a 2.1% forecast in September 2017. The growth outlook for 2019 has been increased by 0.3%. Let’s look now at what drove GDP expectations higher.

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What drove GDP projections higher?

To answer the above question, we need to see what policy changes have taken place since September 2017. The first one that comes to mind is the tax cut for corporations and industries (XLI), and the second is the introduction of tariffs. Apart from policy decisions, rising consumer spending and a lower unemployment rate could lead to price pressures, which could increase economic activity and inflation (VTIP) in the months ahead.

Could the US GDP projections be realized?

Just like any other analyst report, the FOMC members’ forecasts could go wrong or be changed at a later date. The SEP is prepared according to expectations of the members at that point and could change if the economy fails to perform as expected or because of any external risks that could arise in the future. Increased economic projections had a positive impact on equity indexes (VOO), but trade war fears overshadowed the minor optimism from the FOMC’s statement. In the next part of this series, we’ll analyze why FOMC members expect inflation (SCHP) to pick up in the coming months.

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